We Like These Underlying Trends At DRB-HICOM Bhd (KLSE:DRBHCOM)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at DRB-HICOM Bhd (KLSE:DRBHCOM) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on DRB-HICOM Bhd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.053 = RM921m ÷ (RM46b - RM28b) (Based on the trailing twelve months to December 2020).

Therefore, DRB-HICOM Bhd has an ROCE of 5.3%. Even though it's in line with the industry average of 5.3%, it's still a low return by itself.

View our latest analysis for DRB-HICOM Bhd

In the above chart we have measured DRB-HICOM Bhd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for DRB-HICOM Bhd.

So How Is DRB-HICOM Bhd's ROCE Trending?

DRB-HICOM Bhd has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 5.3% which is a sight for sore eyes. In addition to that, DRB-HICOM Bhd is employing 22% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Another thing to note, DRB-HICOM Bhd has a high ratio of current liabilities to total assets of 62%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Overall, DRB-HICOM Bhd gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 96% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if DRB-HICOM Bhd can keep these trends up, it could have a bright future ahead.

DRB-HICOM Bhd does have some risks though, and we've spotted 2 warning signs for DRB-HICOM Bhd that you might be interested in.

While DRB-HICOM Bhd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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